derivatives
Cryptocurrency derivatives market shows growth despite regulatory FUD
The cryptocurrency derivatives market will continue to flourish in 2021 despite the regulatory crackdown on the sub-ecosystem.
The cryptocurrency market has successfully rebounded from the two-month slump it had gone into from late May to the end of July. Bitcoin (BTC) and Ethereum (ETH) have been leading the charge, posting impressive gains over the last two weeks. The market is seeing price levels that it had reached back in May of this year.
Along with the price gains, the cryptocurrency derivatives market that includes financial instruments like futures, options and even micro futures are also seeing rejuvenated interest from investors. According to data from Bybt, The open interest (OI) in Bitcoin options across all the global exchanges offering the product has more than doubled from the yearly low of $3.63 billion on June 26, hitting a 90 day high of $7.86 billion on Aug. 14.
Cointelegraph discussed this spike in OI with Shane Ai, head of product R&D at Bybit, a cryptocurrency derivatives exchange, who said: “The rise in Option OI is mostly driven by institutional players, and the rising popularity of third-party OTC platforms has facilitated easier execution of multi-legged strategies with deeper liquidity — which are prerequisites for more institutional participation.” Data from on-chain analytics provider CryptoQuant also reveals that institutions are buying BTC in the same manner as they did back in late 2020.
A similar spike in growth is seen in the metrics of the Ether options market as well. The OI in Ether Options jumped 75% from $2.42 billion on 30 July to hit a two-month high of $4.26 billion on Aug. 14. This puts the year-on-year (YoY) growth for this market at 846%.
Notably, the crypto derivatives market is still in the nascent stages of its development, as it only sprung into existence in Q2 2020. Even global investment banking giant Goldman Sachs announced their plans earlier in June to expand its foray into the cryptocurrency markets with Ether options.
CME data reveals strong growth in 2021
The growth is seen even in the crypto derivatives products offered by the Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange. CME is often considered to be a benchmark for institutional interest. Currently, they have four crypto derivatives offerings, Bitcoin Futures, Ether Futures, Micro Bitcoin Futures and Bitcoin Options.
According to the data provided by CME, as of Aug. 11, the average daily volume (ADV) in their Bitcoin futures has grown nearly 30% from 8,231 contracts year to date in 2020 to 10,667 contracts year to date in 2021. In the same duration, the open interest for these futures grew by 18.6% to 8,988 contracts year to date in 2021.
While CME has been offering their BTC futures and options since 2017 and 2020, respectively, the exchange launched both their Ether futures and Micro BTC futures earlier this year in February and May.
Since their launch on Feb. 8, CME Ether futures have had an ADV of 2,864 contracts with open interest averaging at 2,436 contracts. A record volume of 11,980 contracts was traded on May 19, and a record OI of 3,977 contracts on June 1.
In the case of CME Micro BTC Futures, they have had an ADV of 21,667 contracts with their OI averaging at 19,990 contracts. This product is designed to enable even retail investors to manage their Bitcoin price risk. Its size is 1/10th that of a Bitcoin and has traded 1.5 million contracts since the launch. An all-time high of 94,770 contracts was traded on May 19 with a record open interest of 38,073 contracts being attained on June 1.
Cointelegraph discussed this growth in the markets with Luuk Strijers, chief commercial officer of crypto derivatives exchange, Deribit who stated:
“We have seen incredible growth in Q1 and Q2 this year showing the potential of derivatives and, in our case specifically, options driven by ever-increasing client demand. We expect this trend to continue as we are onboarding an increasing number of (institutional) clients.”
Organic growth supported by ETH activity
Strijers added that the spike in OI in August was not only due to the rise in price leading to the notional value growing but also due to the expansion of the number of open contracts after the large Q2 expiry for BTC options.
This reveals that the OI growth that the market is currently undergoing is organic and not just a by-product of the notional value rising. He mentioned that this effect was even larger for Ether, adding:
“The latter is explained by the launch of EIP-1559 and the consequence that nearly $100m worth of ETH has been burned since the upgrade. Furthermore, the NFT hype results in a lot of people buying NFTs, using their ETH and buying upside calls instead to avoid missing out on the potential upside.”
The Ethereum network finally underwent the London upgrade on Aug. 5 which ushered in the much anticipated Ethereum Improvement Proposal (EIP) 1559 that changes the transaction pricing mechanism for the network and the management of the fees. Strijers opined on how the London hard fork impacted the upwind for ETH, saying, “The market seems to appreciate the London fork changes. A lot of ETH was already locked in smart contracts or staked, and now the supply is getting even more scarce due to the gas burn mechanism, driving prices upwards.”
Ai mentioned more on the specific impact of the hard fork on the ETH derivatives market, saying that the ETH IV term structure has gone into contango (a scenario where the futures price of the asset is higher than the spot price), alongside steeper call-put skews as trends further in time are observed. Steeper skews could often indicate higher prices for Out of the Money (OTM) put options and lower prices for OTM call options.
Several players in the industry are innovating with automated solutions to simplify Bitcoin options trading for retail investors. Delta exchange, a crypto derivatives platform, recently launched automated trading under the product name “Enhanced Yield” for BTC, ETH and Tether (USDT).
Regulators frown on derivatives trading
Despite the immense growth of the crypto derivatives market, or rather because of it, regulatory authorities are often known to be skeptical of the sector. In the recent past, various organizations have extended their cautionary warnings to curbing actions for players offering these financial instruments in the market.
In a very public settlement, BitMEX has agreed to pay $100 million to the United States Commodities Futures Trading Commission (CFTC) and the Financial Crimes Enforcement Network (FinCEN) to put a case filed in the U.S. District Court on Oct. 1, 2020, to rest. The CFTC charged BitMEX owners with “illegally operating a cryptocurrency derivatives platform” and Anti-Money Laundering (AML) violations.
Related: Cause and effect: Will the Bitcoin price drop if the stock market crashes?
In another instance of regulatory bodies increasing their scrutiny on the derivatives trading sub-ecosystem, global cryptocurrency exchange Binance has announced that they will be shutting down derivatives trading in the European region, beginning with Germany, Italy and the Netherlands. In addition to the EU region, Binance has also announced that they would be restricting access to derivatives products for its users in Hong Kong. CEO Changpeng Zhao mentioned that it was a measure to establish “crypto compliance best practices worldwide.”
Early in January this year, the United Kingdom’s Financial Conduct Authority (FCA) banned crypto exchanges from selling crypto derivatives and exchange-traded notes (ETNs) to retail consumers. The regulatory authority cited the reason for this ban as that these products are “ill-suited for retail consumers due to the harm they pose.”
Despite regulatory organizations cracking down on crypto derivatives, the futures and options markets have continued to show immense growth this year. A report by Inca Digital revealed that hundreds of traders in the U.S. are evading local regulations and trading crypto derivative assets on exchanges like FTX and Binance. These platforms have official U.S. counterparts that don’t offer derivatives products on their platform due to regulatory concerns.
Related: Biden’s infrastructure bill doesn’t undermine crypto’s bridge to the future
However, Brett Harrison, president of FTX.US, the U.S. counterpart of FTX, recently stated that the platform aims to offer crypto derivatives trading in the U.S. in less than a year. Harrison also mentioned that as institutional investors are responsible for nearly 70% of the trading volume of FTX.US, their current aim is to grow their retail base in the country.
This reasoning could be the driving force behind the exchange’s recent decision to hire Kevin O’Leary — aka Mr. Wonderful of Shark Tank fame — as the brand ambassador and official spokesperson for FTX.
While that could be pure conjecture, the growth of the crypto derivatives market is undeniable and inevitable in the future as the liquidity improves. These instruments that provide hedging and risk solutions are much needed by investors, especially in these times of high volatility.
Bullish Ethereum traders can place risk-averse bets with this options strategy
Traders who believe ETH will reach $5,000 can use this low-risk options strategy to cast a long bullish bet.
Being bullish on Ether (ETH) has paid off recently because the token gained 60% in the last 30 days. The spectacular growth of decentralized finance (DeFi) applications likely fueled inflow from institutional investors, and the recent London hard fork implemented a fee burn mechanism that drastically reduced the daily net issuance.
Although Ether is not yet a fully deflationary asset, the upgrade paved the way for Eth2, and the network is expected to abandon traditional mining and enter the proof-of-stake consensus soon. Ether will then be slightly deflationary as long as fees remain above a certain threshold and the level of network staking.
In light of the recent rally, there are still daily calls for Ether to rally above $5,000, but surely even the most bullish investors know that a 90% rally from the current $3,300 level seems unlikely before year-end.
It would seem more prudent to have a safety net if the cryptocurrency market reacts negatively to the potential regulation coming from the United States Representative Don Beyer of Virginia.
Despite being in its early stages, the "The Digital Asset Market Structure and Investor Protection Act of 2021" proposal seeks to formalize regulatory requirements for all digital assets and digital asset securities under the Bank Secrecy Act, classifying both as "monetary instruments."
Reduce your losses by limiting the upside
Considering the persistent regulatory risks that exist for crypto assets, finding a strategy that maximizes gains up to $5,000 by year-end while also simultaneously limiting losses below $2,500 seems like a prudent and well-aligned decision that would prepare investors for both scenarios.
There's no better way to do this than using the "Iron Condor" options strategy that has been slightly skewed for a bullish outcome.
The call option gives the buyer the right to acquire an asset at a fixed price in the future. For this privilege, the buyer pays an upfront fee known as a premium. Selling a call option, on the other hand, creates a negative exposure to the asset price.
The put option provides its buyer the privilege to sell an asset at a fixed price in the future, a downside protection strategy. Meanwhile, selling this instrument offers exposure to the price upside.
The iron condor basically sells both the call and put options at the same expiry price and date. The above example has been set using the ETH December 31 options at Deribit.
The max profit is 2.5x larger than the potential loss
The buyer would initiate the trade by simultaneously shorting (selling) 0.50 contracts of the $3,520 call and put options. Then, the buyer needs to repeat the procedure for the $4,000 options. To protect from extreme price movements, a protective put at $2,560 has been used. Consequently, 1.47 contracts will be necessary depending on the price paid for the remaining contracts.
Lastly, just in case Ether's price rips above $7,000, the buyer will need to acquire 0.53 call option contracts to limit the strategy's potential loss.
Although the number of contracts on the above example aims for a maximum ETH 0.295 gain and a potential ETH 0.11 loss, most derivatives exchanges accept orders as low as 0.10 contracts.
This strategy yields a net gain if Ether trades between $2,774, which is 10.5% below the current $3,100 price, and $5,830 on December 31.
By using the skewed version of the iron condor, an investor can profit as long as the Ether price increase is lower than 88% by year-end.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Ethereum price drops below $3K, but ETH options data reflects optimism
$430 million in ETH options expire on Friday and derivatives data shows that bulls are in control and planning to push prices higher in the short term.
Ether's (ETH) 81% rally over the last three weeks caught professional traders off-guard, and this week's upcoming options expiry reveals that of the $430 million in contracts set to expire, only 7% of the neutral-to-bearish put options will be available if Ether holds above $3,200 on Aug. 13.
Curiously, the crypto market is holding its recent strength despite the Senate's 'crypto-critical' infrastructure deal that recently passed. Although the $1 trillion infrastructure bill may encounter some lengthy hangups in the House of Representatives, the approved version did not clarify what constitutes a cryptocurrency broker, and this is expected to harm the industry in the future.
Institutional investors were likely behind the recent rally
Institutional investors' adoption continues to increase and this week Neuberger Berman, a New York-based investment management firm, filed for a commodity-focused fund. The $164 million commodity strategy fund plans to gain crypto exposure using trusts and exchange-traded funds.
Furthermore, Coinbase exchange reported that 10 out of the top 100 largest hedge funds in terms of assets under management are clients of the platform. Even more interesting for Ether supporters was the 'flippening' that occurred as the exchange traded more Ether volume than Bitcoin (BTC) in the second quarter of 2021.
Coinbase cited the emergence of new use cases, including decentralized finance (DeFi), non-fungible tokens (NFT) and smart contracts as the reason for the high Ether volumes. Whatever the case was that fueled Ether price, bulls now enjoy a vast advantage leading into Friday's options expiry.
Open interest shows an apparent balance between calls and puts
The initial view shows a reasonable balance between the neutral-to-bullish call options and the protective puts, which indicates that bulls lacked the confidence to bet on the recent rally.
Moreover, more than half of the bets have been placed between $2,100 and $2,900. This data clearly shows that professional traders weren't expecting a rally above $3,000.
The result is a meager $2 million of protective puts that will participate in Friday's option if Ether holds above $3,200. This number increases to $19 million if bears manage to push the price below $3,100, and it rises to $27 million if Ether trades below $3,000 on Aug. 13.
Bulls currently lead by $165 million
$167 million of the call (buy) options have been placed at $3,200 or lower. The net result would then be a $165 million advantage for this neutral-to-bullish instrument. This gap will be reduced to $120 million if bulls fail to hold the $3,100 support.
A 10% negative move from the $3,200 price would reduce the neutral-to-bullish instrument advantage to a comfortable $90 million. Thus, there's no reason to believe that bears will try to pressure the price solely due to Friday's options expiry.
Currently, the bulls have complete control and will likely use their profits to create additional bullish bets for the upcoming weeks.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Switzerland’s Leonteq Offers Crypto Assets to Investors in Germany and Austria
Swiss fintech firm Leonteq has introduced its digital asset products in two neighboring jurisdictions, Germany and Austria. The company is launching its crypto offering with the help of a Frankfurt-based bank and in response to interest from institutional and private investors. Leonteq Provides German and Austrian Investors With Exposure to Major Cryptocurrencies Leonteq is presenting […]$400B investment manager Neuberger Berman will allow crypto exposure through commodity-focused fund
The firm reported the fund had more than $164 million in assets under management as of July 31, roughly 0.04% of its total AUM.
New York-based investment management firm Neuberger Berman has filed for a commodity-focused fund to be able to gain indirect exposure to crypto investments.
In a filing with the Securities and Exchange Commission today, the investment firm said its Commodity Strategy Fund would allow investors to have indirect exposure to cryptocurrencies and digital assets through Bitcoin (BTC) and Ether (ETH) futures, as well as Bitcoin trusts and exchange-traded funds. According to the filing, the fund plans to gain exposure to crypto through a subsidiary.
Neuberger Berman reported the fund had more than $164 million in assets under management as of July 31, roughly 0.04% of the firm’s total AUM, $402 billion. The company published a blog in March from senior figures at the firm saying “an investment in cryptocurrency should not be considered part of a standard asset allocation.”
“We’d rather view [Bitcoin] as an option that pays off when expectations for an uncertain, inflationary future increase, and make the finite, non-human controlled supply dynamics of cryptocurrencies valuable,” said the firm. “Those with exposure should understand the speculative nature of their investment and — potential windfalls notwithstanding — be prepared to part with almost all their committed capital.”
Related: GoldenTree Asset Management is reportedly investing in Bitcoin
The Neuberger Berman filing comes following comments from SEC chair Gary Gensler, who recently hinted that he would be more open to accepting exchange-traded funds based on crypto futures rather than through direct exposure. Asset manager VanEck and investment firm Invesco have both announced plans to launch ETFs with indirect exposure to crypto through Bitcoin futures and other investment vehicles.
Binance Restricts Crypto Derivatives Products in Hong Kong, Existing Positions Have 90 Days to Close
Fresh off the heels of Binance’s last announcement to discontinue crypto derivatives offerings in Germany, Italy, and the Netherlands, the company revealed on Friday crypto derivatives products in Hong Kong will cease as well. Effective immediately, users won’t be able to open new derivatives positions and customers with existing derivatives positions have 90 days to […]Binance to restrict derivatives trading for Hong Kong users
Binance is yet to announce an official date for imposing restrictions on derivatives products for Hong Kong users.
Stepping up efforts to minimize the inherent risks of trading cryptocurrency, major crypto exchange Binance has announced it would restrict access to derivatives products to Hong Kong users. The official announcement reads:
“Users from Hong Kong will have a 90 days’ grace period to close their open positions. During the grace period, no new positions may be opened.”
However, Binance’s proactive means to restrict Hong Kong users was not supported by a date of when the restrictions will be imposed. To provide clarity behind Binance’s latest restrictions, CEO Changpeng Zhao said the move is aimed to be a “proactive measure” for establishing “crypto compliance best practices worldwide.”
Zhao also summarized Hong Kong-related developments, stating:
“New Binance users from Hong Kong can no longer open futures accounts and we will wind-down access for existing users.”
While Binance’s proactive ban on Hong Kong users may tend to protect new users, the development seems to be more in line with China’s increased crackdown on crypto business with no exception on exchanges, mining or token offerings.
Related: Binance to shut down crypto derivatives trading in Europe
Binance continues to face regulatory challenges across multiple countries for allegedly offering a platform for illegal trades. In an effort to keep doors open for business, Binance is reportedly on a quest to stop offering high-risk services. As of the latest, the crypto exchange announced the suspension of derivatives trading in Europe, starting with Germany, Italy and the Netherlands.
As Cointelegraph reported, the move signaled Binance’s proactive steps toward harmonizing crypto regulations. However, the Securities Commission Malaysia asked Binance to shut operations within its region completely. Binance was reportedly operating within the Malaysian jurisdiction despite no authorization from the government.
Adding to the mix, Germany’s financial watchdog, the Federal Financial Supervisory Authority, aka BaFin, has also warned Binance of facing heavy fines on the grounds of selling shares in Germany in the form of “share tokens” without offering the necessary prospectuses.
London is live and Ethereum bulls control Friday’s $357M ETH options expiry
$357 million in ETH options expire on August 6 and bears don’t stand a chance given that every neutral-to-bearish put is underwater.
Ether (ETH) price rallied 50% leading in the London hardfork because many investors expect the upgrade to solve the issue of high transaction fees and make the altcoin a deflationary asset.
Pantera Capital CEO Dan Morehead has predicted that the upcoming upgrade would likely cause Ether to 'flip' Bitcoin (BTC) as the leading cryptocurrency but this is a topic under heavy contention.
To understand the impact of the recent price movement, traders should analyze the weekly options expiry. Deribit derivatives currently holds 86% market share in this segment and the aggregate open interest for Aug. 6 currently stands at $357 million.
The neutral-to-bullish call (buy) option provides upside price protection to buyers and the protective put (sell) option holders are safeguarded from downside price movements. By measuring each option's price risk exposure, traders can better understand how bullish or bearish traders are positioned.
Options data shows bears were caught by surprise
The initial view shows a reasonably balanced situation because the call-to-put ratio stands at 1.15 which slightly favors the neutral-to-bullish call option by 15%. This indicator reflects the 70,956 call options that are equivalent to a $191 million open interest, stacked against 61,632 put options which reflect $166 million in open interest.
As the chart indicates, bears were not expecting Ether to reach $2,700 and this can be seen where there are no protective put options (pink area) above that strike price.
If Ether remains above this level by Aug. 6 all of those 61,653 contracts will become worthless. This is extremely unusual and reflects just how unexpected the strong upwards price move was.
The bulls' advantage largely depends on Ether at $2,600
While every protective put option becomes worthless above $2,700, part of the neutral-to-bullish call options has been placed at $2,800 and $3,000. This means even if Ether sustains at $2,700, 39% of the call options' $191 million open interest becomes worthless.
At $2,700, the neutral-to-bullish call options have a $116 million advantage. However, if Ether trades below $2,600 at the Aug. 6 expiry, this figure will decrease to $75 million.
Either way, these weekly options largely favor bulls and boost their reserves for additional bets for the upcoming expiries in August. Bears should prepare to lick their wounds and wait for a local top before trying new bearish options trades.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
This bullish Bitcoin options strategy targets $50K without risk of liquidation
The Long Condor options strategy allows traders to place bullish bets without taking on liquidation risks.
Long-dated Bitcoin options and bulls still make waves with their ultra bullish bets, but even they must admit that the possibility of (BTC) trading above $60,000 in the next couple of months is dim.
Many traders have added leveraged-long positions via futures contracts to chase after the elusive all-time high, but this seems like an unrealistic outcome.
According to Willy Woo, a popular on-chain analyst, exchange outflows and accumulation from BTC miners and whales suggest that Bitcoin price will reach the $50,000 to $65,000 range in the coming sessions.
Even Gary Gensler, the Chair of the United States Securities and Exchange Commission, believes that cryptocurrencies won’t go away and will likely play a big role in the future of finance. Therefore, being moderately bullish for the next couple of months will likely yield positive results.
For bullish traders who think Bitcoin price will break to the upside but are unwilling to face the liquidation risks imposed by futures contracts, the “long condor with call options” strategy might yield more optimal results.
Options are a safer bet for avoiding liquidations
Options markets provide more flexibility to develop custom strategies and there are two instruments available. The call option gives the buyer upside price protection, and the protective put option does the opposite. Traders can also sell the derivatives to create unlimited negative exposure, similar to a futures contract.
This long condor strategy has been set for the Sep. 21 expiry and uses a slightly bullish range. The same basic structure can also be applied for bearish expectations, but we’ll assume most traders are looking for upside.
Bitcoin was trading at $37,830 when the pricing took place, but a similar result can be achieved starting from any price level.
The first trade requires buying 1.20 BTC worth of $42,000 call options to create a positive exposure above this price level. Then, to limit gains above $46,000, the trader needs to sell 1.1 BTC contracts of the $46,000 call.
To complete the strategy, the trader needs to sell 1.3 BTC contracts of the $56,000 call, limiting the gains above this price level. Then a $60,000 upside protection call for 1.22 BTC is needed to limit the losses if Bitcoin unexpectedly skyrockets.
Related: Bitcoin price dips below $38K, with bullish traders eyeing a new higher low next
In this situation, the gain far outweighs the loss
The strategy might sound complicated to execute, but the margin required is only 0.0265 BTC, which is also the max loss. The potential net profit happens if Bitcoin trades between $42,950 (up 13.5%) and $59,450 (up 57%).
Traders should remember that it is also possible to close the position ahead of the Sep. 21 expiry if there’s enough liquidity. The max gain occurs between $46,000 and $56,000 at 0.0775BTC, almost three times higher than the potential loss.
With over 50 days until the expiry date, this strategy gives the holder peace of mind because there is no liquidation risk like futures trading.
Another positive is that most derivatives exchanges accept orders as low as 0.10 BTC contracts, meaning a trader could build the same strategy using a much smaller amount.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.